KEY POINTS:
The Government collects $26 billion a year in personal tax. That raises nearly half of the $55 billion it spends each year (about 30 per cent of gross domestic product).
New Zealanders have twin aspirations: to ensure there is equity through social spending, while also achieving growth and higher living standards. The debate over tax reform usually unnecessarily mixes these two important discussions.
Why do we need tax reform?
In New Zealand, we reach our highest tax rate of 39 per cent at a relatively modest income of $60,000 a year.
We also need reform to:
* Better compete in the global labour market (especially with Australia, where people earning up to $20,000 a year will now pay $1350 a year less tax and those on $80,000 keep $3870 a year more of what they earn than they would if they were here).
* Increase incentives to grow savings and exports.
* Lower compliance costs and incentives to avoid tax.
* Reduce or eliminate fiscal drag. This has seen the proportion of people paying the 39c top rate rise from 5 per cent in 2000 to 14 per cent this year as inflation pushes people into higher tax brackets.
This creep into the top tax bracket is impacting on a greater proportion of some workers (75 per cent of all secondary school teachers), those who want to increase their incomes above $60,000, and others who cannot shelter income through trusts and businesses. Under the present system, many employees pay more of their income in tax than others with the same household income.
The Business Council has put personal tax reform on the agenda for its November 1 Business Budget Summit 2007, which assembles 80 chief executives and the Finance Minister to look for long-term policy solutions.
The public mood
There is little doubt the public wants personal tax cuts.
New ShapeNZ research conducted for the Business Council between September 29 and October 1, covering a nationally representative and weighted population sample of 846 respondents, and also adjusted for respondents' party votes in 2005, finds:
* 76 per cent of people believe the Government should lower personal taxes.
* 72 per cent believe it is affordable.
* 62 per cent of voters will be swayed by tax policy: 13 per cent say a personal tax cut will be the single biggest factor influencing their party vote at the next election, while another 49 per cent say a personal tax cut policy which also balances the need for continued social spending will decide their party vote. Another 32 per cent say issues other than tax will be the main influence on their party vote.
* 42 per cent believe the Government will introduce a personal tax cut next year.
A $10 a week tax cut given evenly to all personal taxpayers could cost the Government about $1 billion a year.
Asked what size of tax cut would be personally acceptable to them, ShapeNZ finds 66 per cent of people choose $20 a week or less (21 per cent $5 a week; 27 per cent $10 a week; 18 per cent $20 a week). These choices would cost between $500 million and $2 billion a year.
Some 13 per cent want $30 or $40 a week from personal tax cuts.
Reform options
The Business Council has researched some reform options for discussion. It does not advocate a particular option.
Some options include changes to the top tax rates and a view that, longer term, the country should try to flatten rates.
Option one - keeping GST at 12.5 per cent and modest reductions in current tax rates: reducing the top individual tax rates of 39 per cent and 33 per cent to 30 per cent, keeping the corporate tax rate at 30 per cent and keeping the lower and middle tax rate at 19.5 per cent.
Option two - keeping GST at 12.5 per cent and reducing the two top individual tax rates of 39 per cent and 33 per cent to 28 per cent, the corporate tax rate from 30 per cent to 28 per cent and keeping the lower and middle tax rate at 19.5 per cent. The low income rebate would be kept for people earning $9500 or less in options one and two.
Option three - increasing GST from 12.5 per cent to 20 per cent and using the revenue to lower personal and company tax to a single rate of 20 per cent. There would be a rebate for people earning $10,000 or less to keep their tax rate at 15 per cent. Benefits and Working for Families allowances would increase to fully cover the rise in GST.
Research by Deloitte for the Business Council shows all options are affordable. Options one and two can be paid for by fiscal drag as incomes rise and more people creep into the higher tax brackets.
Under option three, the Government will still have the ability to raise and spend an income of more than 30 per cent of GDP and run small surpluses. This is after compensating people on benefits for price rises caused by a lift in the GST rate and adjusting Working for Families allowances. These might also have to be extended to include the low-paid without dependents. This may be the only way to ensure that some modest income people are not made worse off on day one.
However, Kiwis are wary of a single-rate system proposal. Some 60 per cent initially oppose it when polled. But when later asked to choose between the three options only, support is fairly even. Option one is chosen by 25 per cent, the single-rate option three is chosen by 24 per cent and option two by 21 per cent. Another 16 per cent don't know.
It seems we remain preoccupied as a nation with who might win or lose on the first day of reform. Not many would argue for a return to a top personal tax rate of 66c in the dollar and for no GST. But we are yet to be persuaded to try something bold. We may continue to recycle last year's fiscal drag, while we head for gradual lowering of rates with a flatter tax base a long term goal.
The decision on what course we follow will be taken in the next six to eight months. The political and personal stakes could not be higher.
* Peter Neilson is the CEO of the NZ Business Council for Sustainable Development.
